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How to Get Lowest Interest Rate on Personal Loan?

If you are looking to apply for a personal loan, here are a few tips that will help you avail a lower rate of interest:

  • Improve Your Credit Score: A high credit score indicates that you are creditworthy. Banks and financial institutions offers lowest personal loan interest rates to applicants who have a high credit score. Thus, you should check your credit score before applying for a personal loan. If your credit score is lesser than 750, you should look for ways to improve it. There are more chances of you getting a personal loan at a low interest if your credit score is over 750.
  • Avoid Missing Repayments: If you miss a loan or credit card repayment, your credit score may be adversely affected. Loan providers usually take your repayment history into account before deciding the personal loan interest rates. Those who have paid their past EMIs and credit card bills on time are likely to be charged a lower interest.
  • Keep an Eye Out for Offers: Banks and financial institutions usually offer special interest rates for a limited period of time during festive occasions. If you apply for a loan while such an offer is running, you may be offered a lower rate of interest.
  • Compare Interest Rates: Before applying to a particular bank for a personal loan, it is necessary to compare the personal loan interest rates charged by various NBFCs and banks. This will help you avail a personal loan at a competitive interest rate.
  • Negotiate with the Lender: If you are an existing customer of a bank or have a good relationship with the loan provider, you can negotiate for a lowest interest rate. When doing this, it is advisable to submit a formal written request to the loan provider.

Among the various points that are mentioned above, the credit score of an applicant is one of the primary factors that is taken into account by banks and financial institutions to decide the interest rate. Make sure to check your credit score at the earliest to ensure that you are offered a favorable interest rate.

CIBIL RatingsCredit ScoreChances of being approved for a Personal Loan
PoorLess than 600You may not qualify for a personal loan
AverageBetween 600 and 750Loan may be approved, but at a high interest rate
GoodOver 750Loan is likely to be approved with a lower interest rate
ExcellentBetween 800 and 900Loan with a low interest rate, faster approval, larger loan amount

Factors that Affect Personal Loan Interest Rates

  • Income: Loan providers take the applicant’s income into account when deciding the interest rate. Individuals who have a high income pose a lower risk to the bank and, thus, might be offered a lower interest rate. On the other hand, those with lower annual incomes may have to pay a higher interest rate.
  • Employer Details: If you work for a reputed organisation, the bank/financial institution is more likely to offer you a lower rate of interest.
  • Nature of the Employment: Loan providers may offer different interest rates to applicants based on whether they are self-employed or salaried.
  • Age: The age of the applicant can also have an impact on the interest rate quoted by the loan provider. Individuals who are nearing the retirement age may be charged a higher interest rate.
  • Relationship with the Loan Provider: Existing customers of the bank/financial institution may be offered a lower rate of interest at the time of applying for a personal loan, provided they have a good relationship with the loan provider. This is, however, at the discretion of the bank and not all existing customers will be offered a preferential interest rate.

Fixed Interest Rates vs Floating Interest Rates – Which is better?

If you opt for a personal loan with a fixed interest rate, you will be charged the same rate of interest throughout the loan repayment period.

On the other hand, the floating or variable interest rate is linked to the Marginal Cost of Lending Rate or the MCLR, thus causing the interest rate to fluctuate as and when the MCLR changes.

The benefit of opting for a fixed interest rate is that you know exactly how much you will be charged during the loan tenure. Thus, those who wish to plan their finances in advance can opt for a fixed interest rate.

If you, however, don’t mind a fluctuating interest rate, you can opt for a floating/variable interest rate. The benefit of opting for a variable interest rate is that your repayment amount will reduce when the interest rate is low.

What is meant by Reducing Interest Rate with regard to Personal Loan?

When you avail a personal loan at a flat interest rate, the interest is calculated on the entire loan amount throughout the loan repayment period. In comparison, if you avail a loan at a reducing interest rate/reducing balance rate structure, the interest is only calculated on the outstanding loan amount. Thus, in this case, when you make a monthly repayment, the interest for the remainder of the loan tenure will be calculated on the outstanding loan balance.

Things to Consider

While selecting a personal loan with a low interest rate, there are a few other things that you should consider:

  • Processing Fee: Loan providers levy a one-time charge known as the processing fee, which can increase the cost of the loan. Even if you are charged a low interest, it is important to check and compare the processing fee charged by different lenders.
  • Pre-Closure Charges: Certain banks may charge you a pre-closure fee if you repay the outstanding loan balance before the completion of the loan repayment tenure. Make sure to check if the bank/financial institution that you are applying to levies a pre-closure charge.
  • Customer Service: In order to have a good borrowing experience, it is necessary to apply to a lender that offers good customer service. Before submitting your loan application, you should check the customer care channels that are available and how prompt the lender is in providing you assistance when required.
  • Eligibility Criteria: While the bank or financial institution may offer personal loans at low interest rates, you should make it a point to check if you meet the eligibility criteria specified by the lender. To this end, you should ensure that you check if your income meets the set limit and if you meet the age requirements specified.
  • Loan Disbursal Time: If you are looking to take a personal loan due to an emergency, it is important to take the loan disbursal time into account. A number of leading banks and financial institutions disburse the loan amount within a matter of seconds.
  • Other Charges: While the lender may charge you a slightly higher interest rate, you may be able to save on the overall cost of the loan if the processing fee, default charges, pre-payment fee, Loan Cancellation Charges, Check/EMI bounce charges, Instrument return charges, Stamp Duty Charges, Duplicate statement issuance charges, swap charges, Duplicate Amortization schedule issuance charges, etc., are low. Thus, make sure you compare the various charges levied by the lender before applying for a personal loan.
  • Discounts: Although the bank/financial institution may have specified a high interest rate, you can try to negotiate with the bank for a lowest interest rate. Many-a-times, lenders will give a discount to existing customers and to those who have maintained a healthy relationship with them.
  • Special Offers: Certain lenders may charge you a lower interest rate during festive occasions.

*Some loan providers do charge a comparatively higher interest rate; however, you should take certain other factors into account before making a decision.

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